Repligen Corporation (RGEN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our next session, which is Repligen, one of the most innovative companies in the bioprocessing space. I am John Kreger, I'm the research analyst at Blair that covers Repligen. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Thanks for joining us. We're going to take the next 30 minutes to go through a fireside chat with Tony Hunt, the CEO of Repligen. Jon Snodgres, the CFO, is also on the line, and so he may chime in where appropriate. And last logistical comment I will make for all of you participating. There is a chat feature, so you are able to submit questions to me, and I will attempt to work them in time permitting. So with that, let's kick it off.

Tony, thanks again for joining us. Let's start with the obvious question, which is COVID-19. Now that we're 4 to 5 months into this pandemic, can you just talk about the lessons learned? And I'm thinking about how you've observed your customers, how your staff, the supply chain is held up. Those sorts of things would be a great way to start.

Yes. So let me start with our customers. So I think we kind of got 2 views of this. The first one was obviously China, Korea, end of February through March, we started to see early fast shutdown of sites and not a whole lot of activity. But what we were also obviously able to observe is, in the second half of April and our second half of March all the way through April, China came back very strong. So did Korea. And apologies for the background noise, John, but I'll keep going. And so -- and then, obviously, when Europe and North America started to close down in the March-April time frame, we started to see signs, obviously, as we were getting into early May that people were beginning to come back online. So I think it's following a similar type of trend. That's what we saw in China and Korea. From a supply chain point of view, I think Jon and myself has spent a lot of time, especially in March and April, really getting our internal folks aligned. And we really worked with our supply chain. We haven't seen any shutdown of any of our suppliers. We've obviously stocked up a little bit, so that we were taking normally 3 months from certain vendors. We might move it up to 5, 6 months. So we've been managing supply chain that's been going well. And then, internally, we moved most of our people off-site, and we've just kept the operational folks working at the different -- we have about 8 sites now. Obviously, many of them are small manufacturing sites. But for the big ones, we're -- we've got the right blend now on people working in small cells. We continue to do that. We have not brought back any additional staff on to the sites. We're thinking about that as we finish off June and into July. And it's kind of like how the states have been doing it, different stages and phases. So we'll start to bring some people back towards the end of June and into July. And we'll just monitor it. I think it's working well for us internally. We don't need to add any extra risk to our operational team. And I think we'll keep doing that as long as we can. And then externally, the sales guys have had to learn, just like everybody in the bioprocessing space, a lot of Zoom meetings, a lot of Webexes. But I think they're really -- we're really active, right? And as I said on the call a few weeks ago, April -- March and April were our 2 strongest months from an orders point of view. So that gave us a lot of confidence about where we were in the first half of the year. And we haven't really -- at that point in time, we haven't really seen any signs that things were going to slow down. And we're expecting that as companies come back online, we begin to see a little bit of what we observed in China and Korea.

Great. Great. That's a great start. Just to follow up on what you just said, Tony. Just as you said, you kind of bumped up your ordering to be safe. Any sign that your customers were doing the same thing? Or do you think that sort of strong order flow is sustainable?

Yes. I think there's been a little bit of that, I would say, mainly on our proteins business side. So I think on the protein side, what we've seen is really the Cytiva GE part of the equation. And we've had good conversations with the team at Cytiva, and what they said to us is, especially in sort of April and May -- well, really April, when we got the extra orders, we got extra orders in March and April for Q2, and they were all COVID-inventory related, not like COVID monoclonal antibody related, but just basically customers who wanted to build up their own internal reserves. Wasn't really Cytiva building up reserves of Protein A ligand, so it was really their customers building up resin reserves. And it will be interesting to just see what happens as, as you go through second half of the year, and probably, more importantly into 2020, what happens then? Do people pull back from those inventory levels? Or do they maintain them? And we'll see and when we get into next year, 2021, how that [ plays ] out.

Before we leave the sort of commercial topic, I know this is a big year for new product rollouts for you. How do you do that in the sort of virtual world that we've been living in the last few months?

Yes. It is challenging. I think the benefit we have right now is we've spent, on a lot of these products, almost from last September working with [indiscernible]. So it's not like we're starting from a standing start right now. We've got TFDF trials that happened all the way through Q4 and into Q1. Definitely, things have slowed down in terms of being able to do trials. But what we're finding now in kind of May, June time frame is people are -- do want to get trials done, but we may not be on site. We may be assisting them remotely on -- for critical stuff, they will bring you on site to work with them to implement. So I think it's going to get better as the year goes on. Not ideal, right? It's hard for a field application specialist to be able to do -- operate remotely with the customers. And it's no different for anyone else in our industry. So I think people are just adapting and our customers are flexible. And I think people are just getting a little bit more comfortable that if someone comes into their office, they're not going to get sick, right? It's -- I think there's a little bit less of the fear and more of the -- hey, the procedures and protocols that all the companies have put in place are good protocols and procedures. And they appear to be working. So I think it eases up a little bit as we go through the summer months and into the fall. And obviously, it's a little unknown right now what happens with, is there a second wave and how that impacts people from a site point of view. But lots of site procedures. Wear masks. We have dedicated conference rooms for people. We definitely want to be able to do demos, whether it's at a customer's site or at our office site. So I think flexibility is probably the keyword right now than adaptability.

Great. Question, does the pandemic change your longer-term strategy at all, either in terms of where you put your innovation resources or even how you sort of construct your physical plant over time?

Yes. It's a great question, too. And I think from an innovation point of view, there probably are some opportunities out there where there are technologies that could be optimized that might actually help on a COVID-related, longer term maybe, treatment. So -- or a vaccine that's -- people are thinking that's not immediate. So it's kind of hard, right? So if you think about the vaccine approach, it's like do it now. Do it immediately. So the ability to innovate and influence is probably pretty low. But for people who are thinking of the second-generation version, there are some opportunities around innovation. We're looking at those, but it's -- I don't think it's a big part of what we're doing. I think the bigger part really is around really working with the accounts and customers that we have a strong working relationship with and working with them to see if we're going to get into whether it's a vaccine or it's into a treatment drug that's been manufactured. And I would say we're, well, 6 months, 5.5 months into the year. And I said it on our earnings call, we definitely are working with some of the vaccine manufacturers. And we're definitely working with some of the mAb guys, and we're definitely working with people on the diagnostic side. So we will have activity associated with COVID. I think it's a little early to figure out what that -- how that translates into volume because part of it depends on how fast people move. And then, it also depends a little bit on how far does a customer X get into clinical trials and still continue to be successful. So it's early days, but I think if you had to pick a year that would have revenue impact, it will be 2021. There'll be definitely revenue impact in the second half of this year, but probably more so in 2021.

Excellent. In the early days of the crisis, one of the things that we worried about with you was, since a lot of what you do is helping to produce the components that make the drugs and clinical trials, will that be disrupted? And I know, in recent months, that really has not been an issue. Curious as we're farther into the crisis, whether or not you've seen any of the sort of non-COVID development activities slow down.

Yes. I mean look, from a Repligen point of view, we definitely have some examples of product lines that have definitely [ been ] a little weaker that have been impacted by COVID. But I think it's been outweighed by increased activity in some of our filtration chromatography products and probably some pickup from early COVID work that's going on. But in general, there's a 6- to 9-month lag between when production of a clinical material is completed and a clinical trial starts. And so we haven't really seen anything through beginning of May when we did our earnings call to suggest that -- and it was a slowdown in coming. Now obviously, we don't really have visibility into second half of the year, specifically Q4. And so there might be something at the back end, but at least through the first 4.5 months, when we did our earnings call 4 months and a week, we were seeing pretty steady progress towards our annual goals. The order run rate's looking healthy. Our pipeline's been looking healthy. And while, yes, we've seen some delays where stuff has been pushed out because manufacturing sites are challenged in terms of the number of trials or drugs that they can produce, we're talking about a couple of months type pushout as opposed to [ some ] was 3-, 6-, 9-month push out. So that's kind of what we've seen.

Great. And I apologize for jumping around. I should have asked you this a minute ago. But as the COVID-19 programs are ramping and you're trying to support that, what are the sorts of products within your portfolio that are particularly in demand?

I'd say for -- if you think about our filtration and chromatography products, our chromatography portfolio is essentially OPUS, right? And so that's -- and if you look at our filtration portfolio, we have 4 or 5 product lines, 4 product lines in our filtration portfolio. So definitely, our filtration portfolio because we have hollow fiber technology, because we have flat sheet cassette technology, because we have single-use flow pads and systems, that's definitely where we've seen most activity. But we definitely [ have ] seen activity on the prepacked comp side as well. So they would be the 2 product lines, 2 businesses.

Great. Great. Okay. Let's pivot. If we think about end markets overall, what are your current thinking about how the market is held up? Again, trying to -- it's difficult to trying to sort of ignore the pandemic. And how are you feeling about the end markets at the moment?

Yes. I think overall, I would say through the first 1/3 of the year, end markets have held up really well. If you look at it from a biosimilar gene therapy, cell therapy, it's as active this year as it was last year, right? And there may be some companies that have slowed down a little bit, but the pipeline was always rich. So it wasn't like we were dealing with the weak pipeline to start with. So I think that's been very positive. I think on the end users for reference, and CDMOs have been particularly active, I think you've seen that in terms of updates from Catalent and updates from Lonza and just some of the press releases in terms of the activity and the deals that have been struck over the last 3 or 4 months. So I think the CDMO space is really healthy. And then I think the biotech pharma guys are prioritizing what we can and cannot do over the course of over the course of the next, say, 6 to 9 months. But so far, I think we're actually really happy with where we are, where the end markets are, and the -- how our portfolios are kind of positioned into those applications.

Great. Any changes on the competitive front? Are we far enough into the creation of Cytiva to have a view on how they or others might be changing their tactics?

Probably too soon on that. But look at Cytiva before it was GE, and they were clearly a formidable competitor. They still are. I mean they've got the broadest portfolio of products. They've got a massive commercial organization. They've got a strong R&D engine. I think they've done a really good job of transitioning across from GE to Danaher. They're very active out in the field. And we expect that, that will continue to be a pretty good competitor for the foreseeable future. And obviously, they got the call piece of the portfolio that's side-by-side with what they're doing, even though they're running both organizations independently at the moment.

Got it. Okay. You have been a part of life sciences and bioprocessing markets for a long, long time. So if you kind of think back and how those markets have sort of ebbed and flowed, what's your current thinking on end market growth rates? And does the -- all the innovation and funding strengths that we've seen in recent years change your view on where that might go over the next 5 years?

Yes. Look, we've had this conversation a few times over the last 5 or 6 months. I would have to say that the end markets are as strong. COVID, put to one side, and obviously, March and April was a challenging time for everybody. But I would have to say that if you look at where we are as an the industry in 2020 and compare to where we were, say in 2010, we're in a much stronger position, right? You've got cell and gene therapy that just didn't exist 10 years ago. Now just really taking off. I think the whole COVID piece is putting a lot more -- shining a bigger spotlight on vaccines and the importance of vaccines. So I think that's only going to help in the longer term. So yes, I'm pretty bullish about the next 5 years to be perfectly honest with you.

Excellent. If you think about your portfolio today, proteins, filtration, chromatography, bioanalytics, do those all have kind of comparable, longer-term growth opportunities? Or do you think about them differently?

I think there -- each business is different in the sense that you're really addressing a different part of the workflow. And there's a strategy that we have, whether it's chromatography or filtration or analytics. So even our proteins business, honestly, the strategy we've put in place a few years ago of working with Navigo and working with Purolite, that's actually worked out quite well for us because it gives us a little bit more control over our own destiny. And I think that's a positive thing for Repligen. So each of our businesses, we have a different strategy, which is centered on, what are the key R&D products we need to develop? How do we continue to differentiate ourselves in the marketplace versus the competitors? And then once the M&A play for each of those businesses, so it's the same approach, but it's different, right? And I think we feel, when we look at our filtration portfolio, that we'd probably put one of the best filtration product lines together, especially addressing the upstream needs of customers. And we think that the combination of ATF [indiscernible], TFF hollow fiber and TFDF technology puts us in a very strong position in the harvest clarification space, whether you're in fed-batch perfusion or you're dealing with mAbs or you're dealing with cell gene therapy, so our gene therapy viral vectors. So I think we've positioned ourselves quite well for the future in that space. And then as we think about the next few years, I think the ability to wrap more systems around what we do, like if you think about us, we're a very much a consumable company. And a little bit like the razor blade, but not a whole lot of razors, right? And I think what we've been trying to do over the last 2 years has built out that systems part of our business. So C Tech is a big part of that. But the systems portfolio that we've been building out for our whole fiber business that came from Spectrum, that's been an important part of what we're focusing on. So I think they're -- it's going to drive a lot of what we're going to do in the next few years in terms of our success.

Great. You mentioned C Tech. Let's spend a few minutes there. How is that going? I know a big part of the strategy was to ramp up the commercial organization. And again, curious if you've been able to fully implement that in this environment.

Yes. So sales team's up and running since the beginning of the year. We have either -- I think it's 9 or 10 salespeople now versus 1 and a bunch of distributors a year ago. I think the piece that was -- that we recognize, Craig, who's the C Tech owner, who's now part of Repligen, we all saw that when we did that deal, that they have done a phenomenal job of getting the technology into the biggest accounts in the world, but they really haven't kind of spread their wings, right? So while you might be in some of the top accounts, the next level down, they just didn't have the bandwidth to go knock on those doors. So we always felt that if we could build out the sales team and get balance between North America and Europe, and then some hybrid approach in Asia where we're using our best -- their best distributors plus some direct salespeople, that we could start to move the needle. So we've been really focused on building out the funnel. Clearly, COVID didn't quite help us in -- at the end of Q1 and early Q2. But the guys are working really hard. We brought down our -- kind of our guidance for the year a little bit on C Tech, I think, were around that $32 million. I think we're more in that $30 million. We'll probably be in the $30 million to $32 million range as opposed to $32 million to $33 million. And it's not a reflection of anything to do with the technology, more a little bit about our service organization, which is a decent percent of the C Tech business is just much, much harder to go on-site and do routine service in instruments. So we've started to figure out how to do that remotely, how to show customers how to do it. So we had probably a little bit of a lag as we figured out how to deal with service. And that will come back, I think, pretty strong in second half of the year. So still a good year. We had 22% growth in the first quarter. Expect it's going to continue to be a good performer for us. And I think we're really excited about the future because while SoloVPE is a standard in the industry, FlowVPE is just getting off the ground. And we think that that has as much potential as TFDF technology in the marketplace to become a standard. So again, one of the drivers, I think, in the future for growth for Repligen.

Great segue. I was going to ask you about that next. Talk a little bit more about why FlowVPE is so important. And where does that stand? I know that's one of the key launches this year. Where does that stand? Has that sort of been rolled out yet?

Yes. Well, the good news is that FlowVPE's been in the market for 2 years, and there are a lot of customers who are using the technology. But it isn't -- it was never really optimized in the sense that the -- it was the first version of the product. So customers would prefer it to be a little smaller in size. So we're working on that. They'd also prefer to have a little bit more GMP-like software associated with the product, so we're fixing that. So when we launch at the end of the year with next-generation flow, we're launching into an installed base of customers that already like the technology, that are asking for certain features and benefits that they've been talking to Craig and the team for the last couple of years. So -- but for us, it's not like -- something like TFDF where no one's ever heard about it before and no one's ever used it before. This one is people are using it. We're selling instruments. I think we can sell more. And the reason I think it's exciting is no one today is doing real-time protein concentration measurement. So you can do it off-line and you can do it fairly quickly off-line. But to be able to get a reading on your protein up to 250 mg per ml, which is incredible, and to be able to do that in 2 to 3 seconds or whatever the length of time, but it's a few seconds, is something that chromatography people have always asked for, and people who are doing the protein concentration around formulation have always asked for. So when you're concentrating a drug and you want to go from, say, 10 grams per liter to 100 grams per liter, you do have to concentrate using batch records to get up to that 100 grams per liter. But you're taking samples and testing it to say, "Hey, am I at 98, 99 of mAb? 102? And then you kind of have to dilute to go back to 100. In this case, it tells you exactly in real time. Oh, you're at 99.5. You're at 99.9. You're at 100. Stop. And so those are things that are -- people see the value and expect that it will definitely become the standard. And we can integrate it now, start to think about integrating it into our screen systems that we're building. So it gives us even further differentiation on our systems as we promote those systems into the marketplace.

Great. And I think you said the next-gen version you're shooting for year-end? Is that right?

Yes. It will be Q4.

Okay. So more of a '21 event in terms of [ commerciality ]?

Yes. Absolutely. But don't forget that we're selling flow this year, and it's doing well.

Excellent. Okay. You mentioned TFDF. Let's go back to that. I know that's been another really important of the new product drivers. How has the early uptake been? And just remind us why you think that is such a key new offering for you.

Yes. So if you think about Repligen's portfolio, we have ATF that's playing in the perfusion space, which represents 25% to 30% of the market. [ We've been able ] to expand the applications of ATF into what we call, the seed train, especially in the fed-batch part of the marketplace, which is 70% of the market. So we're beginning to put ATF into the seed train part of fed-batch manufacturing. But we really don't have a solution for harvest clarification and fed batch. And that's where TFDF comes in. So now when you think about it, you can use ATF in the seed train per perfusion process, and you can use it in the perfusion bioreactor. You can use ATF in the seed train or a fed-batch bioreactor. And then when you get to the fed-batch production bioreactor, you're using TFDF technology to do the harvest clarification. So we've come from maybe 4 years ago, addressing 20% of the market to the last couple of years because we can get into the seed train part of fed batch. Maybe we're addressing 30% to 40% of the market. But now with the 2 technologies, we have the opportunity to address 100% of the market. And so now you can start to compete with the depth filtration pads that people are using in fed-batch clarification. So that's an opportunity for us. And then more recently, we've really started to see if you could apply the principles of TFDF into gene therapy, especially in the viral vector space. So in April -- March, April, we did a joint publication with Oxford Biomedica about using TFDF in the harvest clarification of lentivirus, which represents kind of ironically, 30% of the market. And so that gave some significant improvement in yields. And of course, everything in the gene therapy space is about yield. And so, obviously, we will be looking to see, can we apply that more broadly into the AAV space as well? But the fact that you can take a core technology now have 2 markets is really, really positive. So we get through COVID, we can get a lot more trials going. And again, I think it's -- we've said a couple of million dollars this year in revenue, but it should double next year. It should double the year after. It's -- it does -- there's nothing -- unfortunately, there's no like hockey stick on product adoption in our space, right? It's you kind of have to earn. You got to do a bit of grafting, and you got to earn it. And then -- but I think we can double every year for the next 3 or 4 years. And then all of a sudden, you start to get into ATF-type numbers and ATF-type growth rates that -- as people start to adopt the technology. So yes, we're pretty confident about the technology, and I think we're confident about our ability to broaden the number of applications for the technology as well.

Great. We only have 2 minutes left, and there's 2 topics that we didn't cover. I'm going to throw them both out, and you can maybe give us the 1-minute answer on each. So first is your thoughts about the '21 outlook and puts and takes. I realize it's very early, but it seems like there's a pretty good potential in terms of your new product launches this year. And hopefully, we're coming out of the pandemic, but I'm sure there's some puts and takes that I'm not thinking about. So that's question one. And the second question is, when would you like to get more active again in M&A? Is that sort of the move to the back burner given all the distractions around the crisis? Or would you like to move ahead more quickly?

Yes. So on 2021, I think the way we view it is we're really confident about the products we're getting out this year. So it should drive a year, next year, where we should be able to grow probably at the high end of our 10% to 15% range, probably in that 13% to 15% range. I think the wildcard for next year will be really COVID, right, and what opportunities do you get in the second half of this year? And what impact does that have for next year? So I would say, it's in that 13%-plus-type growth rate for next year with some potential upside coming from COVID-related opportunities. And then on the M&A front, it's more we're as active in terms of conversations this year as we were in 2019. But you're absolutely right. Like look at March and April, it was pretty dismal, right? It was -- like the banks that would normally come to us with opportunities were pretty silent. But we expect that there'll be plenty of activity in terms of conversations in 2020. And we're on the same track that we've always been, that we'll do a deal every sort of 12 to 18 months. So that's kind of the range we tend to think about, right? We're not trying to do 3 or 4 deals. It's more around trying to cherry-pick and do the right deal for Repligen. And supplements then are complemented with what we're doing with our R&D portfolio.

Excellent. All right. Well, we're right at the stop time. So let's cut it off there. Thank you very much for all the insight and the time. Best of luck with the rest of the year, and I thank all of you listening. I hope this was a useful discussion.

Thanks, John.

Cheers.

Thanks, everyone. Bye.

Thank you. Bye.